It has now dawned on EU authorities that the union’s agonising dependence on Russian natural gas will be compounded by Russian companies’ market power over fertiliser. As one Eurocrat told me this week, “You do not get a Nobel Prize for seeing this fertiliser situation as a threat to Europe’s food security.”
Now there is strong sentiment among some in Brussels to respond to such a threat, perhaps through legal challenges and competition proceedings. This comes after the announcement this month that the EuroChem Group has made a binding offer to buy the nitrogen fertiliser and chemical assets of Borealis, now owned by OMV, the Austrian oil and petrochemicals company.
As a European fertiliser industry executive pointed out: “This will make EuroChem the second-largest fertiliser company in Europe, after Yara [of Norway].” The home country of EuroChem’s management and the core ownership group are in Russia, which, by the way, just imposed a two-month ban on its own fertiliser exports that ends April 1.
It does not help the European food industry that Yara International and other incumbent producers are now increasingly dependent on Russian gas or imported LNG that is several times more expensive than what the Russian fertiliser industry pays for the same input. Natural gas accounts for about 80 per cent of the cost of European nitrogen fertiliser. Yara was forced to curtail production last year because of rising gas prices.
In the year to last December, EU farmers saw the cost of their natural gas rise by 549 per cent, and nitrogen fertilisers’ cost increase by 263 per cent. Not surprisingly, many of the farmers have held off on buying enough fertiliser to maintain their crop yields this year. As one German MEP said: “Some of us are worried about a 10 per cent decline in food production, though the optimistic view is that there will only be a 5 per cent decline.”
Conditions have been in place for a good harvest in Europe this year. However, while the “first dressing” of fertiliser on fields is mostly being completed this month, agriculture and industry people worry about the “second dressing”, particularly for grain crops, that will be carried out (or not, or on a reduced scale) in May and June.
The hesitant farmers are putting the supply risk (and the price risk) on the fertiliser producers, who are concerned about the “logistical crunch” that could choke roads, warehouses and manufacturing facilities forced beyond their design capacity.
Easing the immediate pressure on European food supplies by importing cheap foreign grain will be a challenge. In recent years Russia moved from a communist-era grain importer to one of the two most important grain exporters in the world, along with Ukraine. To maintain plentiful domestic supplies, however, Russia has also restricted grain exports for several months.
Given that prices of wheat and other cereals in the EU were already up between 38 and 59 per cent on the year, that is not good news for Europeans.
Europe may lack fertiliser, but it has plenty of trade lawyers and experts who know how to manage official trade proceedings. There have been murmurs in Brussels about challenging Russia’s fertiliser export restrictions at the World Trade Organization, but as one European official admits: “That would take four or five years, and for what?”
Another possibility is to launch an EC “competition” proceeding to block EuroChem’s takeover of Borealis. Most of the discussion so far has been among European agricultural specialists, but as one of those said: “We work in a collegiate manner and we would expect our counterparts in the DG [directorate-general] for competition are aware and are concerned about the risks.”
Of course Russians have lawyers too. And the truth is that it’s not EuroChem that caused Europe’s gas and fertiliser crunch. The member states decided among themselves that they did not want to drill for more gas on their own territory. The carbon impact of European gas use was just shifted to politicised Russian wells and pipelines and expensive LNG imports from America or Qatar.
Oh, and before the deep green people in the room suggest a virtuous switch to “organic” fertiliser, variously defined, they should keep in mind that grain crop yields per hectare decline by nearly half when dressed organically.
Europe has great technology strengths, but gas and fertiliser do not come from a virtual reality headset. Russians had a strategy, and they have executed it.